Sephora sells beauty products. A small lip gloss, sells for $50 per unit. The contribution margin per lip gloss is 35% while the fixed expenses associated with the stove total $105,000 per month.
a. Compute the break-even point in unit sales and in dollar sales.
b. At present, the company is selling 10,000 glosses per month. The sales manager is convinced that a 20% reduction in the selling price would result in a 25% increase in monthly sales of lipgloss. Should Sephora reduce the selling price?
c. How many lipglosses would have to be sold at the new selling price to produce a net operating income of $40,000 per month?
Ans. | ||||||||||||
a. | Per Unit Sales price= $50 | |||||||||||
Contribution margin per unit is 35 % | ||||||||||||
hence contribution is 35% of $50 = $17.5 per unit | ||||||||||||
Variable Cost | =50-17.5 | |||||||||||
Variable Cost | $ 32.50 | |||||||||||
Fixed cost per month = | $1,05,000 | |||||||||||
Break even point in unit= | Fixed cost/contribution per unit | |||||||||||
'= | =105000/17.5 | |||||||||||
'= | 6000 units | |||||||||||
Break even point in dollar sales= | 6000*$50 | |||||||||||
'= | $3,00,000 | |||||||||||
b. | At present company is selling 10000 units per month | |||||||||||
Sales prices | =10000*50= | 500000 | ||||||||||
Contribution=35% | '=500000*35% | |||||||||||
'= | 175000 | |||||||||||
Less: Fixed Cost= | -105000 | |||||||||||
'Profit '= | 70000 | |||||||||||
If Companay reduces 20% sales prices then increased units in month sales will be 25% more | ||||||||||||
revised Sales price= | =50-20% | |||||||||||
revised Sales price= | 40 | |||||||||||
revised Sales unit= | =10000+25% | |||||||||||
revised Sales unit= | 12500 | |||||||||||
revised Sales = | =12500*40 | |||||||||||
revised Sales = | 500000 | |||||||||||
Less : Variable Cost @$32.5 | 406250 | |||||||||||
Contribution= | 93750 | |||||||||||
Less: Fixed cost per month = | 1,05,000 | |||||||||||
Loss | (11,250) | |||||||||||
Hence there is decrease in contribution and resulting in loss after reducing the price hence price should not be reduced . | ||||||||||||
c. | To make $40000 profit per month | |||||||||||
revised Sales price= | 40 | |||||||||||
Less : Variable Cost @$32.5 | 32.5 | |||||||||||
Contribution per unit = | 7.50 | |||||||||||
Fixed Cost= | $1,05,000 | |||||||||||
Break even point in unit= | =105000/7.5 | |||||||||||
14000 | ||||||||||||
To make $40000 profit per month required units will be | ||||||||||||
=break even unit i.e 14000 + 40000/7.5 | ||||||||||||
=14000 + 40000/7.5 | 19333 | |||||||||||
To make $40000 profit per month 19333 units will be required to sold |
Sephora sells beauty products. A small lip gloss, sells for $50 per unit. The contribution margin...
Sephora sells beauty products. A small lip gloss, sells for $50 per unit. The contribution margin per lip gloss is 35% while the fixed expenses associated with the stove total $105,000 per month. Compute the break-even point in unit sales and in dollar sales.
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